Being “Upside-Down” in a loan is a phrase most commonly used with car loans. It means that you owe more than the car can be sold for. With cars, if you are in this situation, you have to actually bring cash to the table to sell your car.

So if you have an outstanding loan of $20,000 on the car that you bought for $25,000, and you can only sell it for $15,000, you have to come up with $5k to sell the car. You take the $5k hit now, but save on years of monthly car loans that will far exceed $5k.

Regrettably this starting to happen on a somewhat frequent basis with homes. This did occur in the mid 90′s but was unheard of again up until a year ago.

So a home owner buys a place a year ago for $300,000. Lets say he puts 5% down or $15,000 and the loan is for the remaining $285,000. He buys it as a long term investment, but something went wrong: job relocation, divorce, scary neighbors, whatever. He wants to get rid of it and he is faced with a house that can only clear $275,000 due in part because of the market drop and after darn Realtor fees.

That home owner is now “Upside-Down.”

His options are:

1. Sell the house and literally bring a check for $10,000 to the closing and saying goodbye to the $15,000 initial investment. Total loss is $25,000

2. Hold onto it, rent it out, in hopes of a bounce back. (And then really make a killing, right!)

Most people will go with option #2.

There is something about human nature that makes us feel more pain losing $1,000 than the joy of making say $10,000, which we rationalize as deserving. People would rather fight the smallest loss today, even if that means running it all the way down to bankruptcy.

I’ll focus on Option 2 because that is what most people do, but most haven’t evaluated all the pros and cons of that decision. First of all, you have to realize that you are now in Vegas, and you are essentially doubling down your bet. You aren’t evaluating the current situation (“cutting your losses and running”) and instead you are gambling that the future will be better… eventually.

If you are betting on Red in Vegas, just double down! Eventually you will break even right? Even if you are in for $50,000, Red has to hit soon right? Come on Red!!!

While your Red might hit eventually with real estate, you have to be prepared for the worst.

What is your plan?

1. Holding out for the “Spring.”Hopefully the market will bounce back and you can then take a lower loss or seek the holy grail… breaking even.Great, yes the Spring is usually better, but usually during an up market. Last year the winter was horrible and the spring just extended that downward. All the houses that sat in the winter were still there, and for a lower price once spring came. The newly listed houses then had to start with a lower benchmark. So waiting might cause your house to go down another $10k-15k.

2. I’ll just rent it! Easy as that!Ok, but have you run the numbers? Oftentimes you will have as much as a $400 per month discrepancy between your mortgage and your rent. That makes for about $5,000 a year. After 3 years you are $15,000 behind. If the market rebounds great, but if it stays flat, you are now $15k deeper in debt. What if it takes 10 years to recover? It happened in 1990. Also you can’t just count the sales price, you have to consider all the expenses along the way. Oh and ask your accountant, but the tax advantages that you had while owning the place you lived in are gone.Also I almost forgot, what about that 5 year ARM that is coming due and you haven’t sold it yet and your mortgage goes up 30%?

3. I’ll live in it.Ok, but I thought you wanted to get out of the place? Your time horizon better be long enough to ride out the storm. If this is just a 1 year bandaid, you might be even worse off in a year (nobody knows, except the National Assoc of Realtors, NAR, of course!). Also if you have a mortgage of $2,000 and you have the option of renting out a smaller place for $1,000, you have to calculate the $12,000 savings a year (but don’t forget your calculate back in your tax advantages).

For some of you, the numbers might leave you no real choice. If you can’t come up with $15,000 to sell it now, you just can’t do it. But for the rest of you, that are electing not to do it because you feel the pain of a $5k loss (or even $50k) is just too much, just be prepared for a worst case scenario in 1 year or 3 or 10 when you wish that you were only $5k behind.

In my blog on Leverage, The Untold Risks With Buying. There is an example of a lady that lost $150,000 over 250 days, I bet she wishes she cut her losses earlier. She couldn’t believe it could go down that much. This is DC!!

My intention is not to scare or depress anybody. I just want to make sure that you have fully thought out what your options are. I can’t tell you where the market is going (see blog on Realtor’s aren’t stock brokers), but you have to be prepared for all scenarios. I know you will hit yourself if you take a loss and the market recovers, but what would you feel if it didn’t and you had to file bankruptcy?

Most Realtors won’t go over the doomsday scenario of above, but it is real. Our job is to make sure you look at all your options and only you can decide what to ultimately do. If you sense a bit of bias in here, that was fake. I just put that in there to counter balance your preexisting biases.

Also read about a DC condo owner that was Upside-Down in the New York Times: Buyers Scarce, Many Condos Are for Rent “Could he rent the condo? Yes, but that option is not appealing, either. Mr. Murphy estimates that the unit could rent for $4,000 a month, far short of the $6,800 a month the condo costs in mortgage interest, maintenance fees, insurance and taxes…”

36 Responses to “I'm "UPSIDE-DOWN," What Should I Do? Lose $25k?”

Don’t forget that once you rent out your condo for at least 3 months it is considered a “business” for tax purposes. Thus is one of the only ways to “shelter” a R/E loss — as a business loss not personal loss. As a landlord you can also write-off the condo fees and begin depreciating your buy-in cost basis, as another tax shelter. However, it is true that the loss will be spread across many future tax years, diminishing its value with inflation.

Nonetheless, something to consider in a doomsday scenario and something to speak with an accountant about!

I owe 156,000 on my mortgage and 23,000 on a home equity loan. I have been relocated by my employer and have to sell my home. If the relocation company buys my home for market value, I am afraid I will not get the money I need to pay off both loans. I do not have the money to pay off the home equity since the housing market has dropped so much. I can’t rent out the house. What are my options? I am desperate! Any advise you can give me would be greatly appreciated. Thanks,

Anonymous, The reason you can’t find a solution is because there isn’t one.

How big is your job raise? $5k? $10k? If you are going to lose $20k on your house, maybe it isn’t such a big deal.

If your raise is $10k and you will lose $5k on your house, maybe you can get your employer to eat the $5k and make your raise smaller for the first year.

I know you don’t want to rent your house, but you didn’t say why. My guess is you will lose money vs your mortgage. Well $200-$400 a month loss is better than losing $10-$25,000 right?

You might be able to try a “Short Sale” , google it and sign up for my blog as I planto write about it soon (upper right corner). Problem is banks tend to say “no” to this. A short sale is where the bank takes the loss and lets you sell for less (watchout for the tax consequences). Many banks just say “no” and let it get foreclosed on.

Also the company buying your home might have some flexibility. Appraisers, if they have a target, can sometimes do wonders.

Bought my cute little new home a year ago for 255,000. The developer is now selling the same model for 178,999 (with crazy incentives). I didn’t buy a house to make money, and wasn’t worried about fluctuations here and there. I just hadn’t a clue that the value could drop by 30%….leaving me trapped in a house that is so upside down it scares me. If I stay, I pay and scrimp for value that doesn’t exist. If I walk away, my perfect credit is ruined and I’ll feel ashamed for buying at the wrong time. I didn’t get a shifty loan and I can afford my payments-, but I still think about walking away and just renting a room. I made a mistake- so now comes the punishment: the rock or the hard place. I feel like I can’t breathe.

Anonymous….I absolutely feel you. My wife and I are in the same boat. I can afford the payments (barely), I just bought at the wrong time. I feel like i will never be able to sell my home at a profit (or break even for that matter). We bought for $310,000, and now it is worth about $240,000. It makes me want to cry…but i am a man and we don’t do that :)

I have a condo that TANKED miserably! I owe 158K and right now the most I can list and get any interest is 115K… I don’t have the difference to bring to the table and an unsecured loan for the difference is also out of the question… I am stuck and have to rent it and hope that somehow I find a miracle lottery ticket for 50K! I just can’t short sell or foreclose!!

I late to the pity party. I live in Florida, a area hit VERY hard. I had made good money off a sale in late 2005, and then waited for the market to “fall” into April 2007 before I purchased a home. I thought I did the right thing. I thought putting down 15 percent was responsible, and my mortgage is a FHA fixed rate.

Fast forward 1.5 years later, my house has dropped at least $40,000 from what I paid for it, from all estimates. My partner and I would like to move up, but no go. I don’t know whether I should make any improvements to this house. I have thrown enough money into the fire and from all estimates it could be 5 years before things normalize.

The job market here is awful in my field and I am feeling like things are so slow I may be in jeopardy. I curse my decision to buy the place.

I need some advise. I am a single grandma raising 2 grand children 3,17,years. I have a developmentally handicapped son who lives with me, My sister and her husband have had to move in with me do to elderly abuse. A Real estate woman,had them sign a power of attorney so she could help them.My sister and her husband are very trusting. She ended up taking off 130K and their retirement,home and car were reposessed. Leaving them to file bankrupts and only $1k to live a month and no place to live (rent is more than that). I am supporting us all. I will be laid off in October 15, do to Citi’s getting out of the mortgage business. Not much of a severance because I have not been here long enough. My home has an adjustable interest rate that is coming due next year. I have asked the lender to give me a modified loan but was told the interest I am paying is as low as they will go (6.75%). They will not adjust the loan price, it is too high at $2300 a month. I owe 340k it is worth only 200k know so I am unable to refinance with some one else to get a lower payment so I can keep my home. I don’t know what to do I am desperate for an answer.

We bought our home three years ago in Phoenix area for 311,000, we refinanced once now we owe 325,000, I just saw some online same house down the street from 180,000 to 154,000. makes me sick , really sick! I guess theres much much we can do.

We bought our home three years ago in Phoenix area for 311,000, we refinanced once now we owe 325,000, I just saw some online same house down the street from 180,000 to 154,000. makes me sick , really sick! I guess theres much much we can do.

Due to the market downturn, we are now nearly $200K upside down on our mortgage (the combination of our first and small second mortgages), and I have been unemployed for three months. We are current on all payments, thus far. And, it’s possible that my next job may be out of state. Thus, what do we do with our current home; walk away and let it go into foreclosure, seek a short sale, seek a deed in lieu, or??? Please advise. Thanks.

That was an informative article but I think it still left people up in the air as to what to do. It seemed like the article was leaning towards “take the immediate loss because the long term losses will be greater.”
OK well I was thinking that way. Where does that leave someone like me that is upside down and doesn’t have $10K to $20K to put in? How would someone like me be able to move out of a 2 BR 2 BA Condo into a 3 BR 2 BA Single Family Residence?

Based on a late May, 2009 appraisal our house is now worth $200K less than we paid in 2006, and we are upside down about $73K. Wells Fargo is our lender and to my surprise they suggested a short sale. A brief conversation with Wells Fargo short sale specialist revealed they are directing anyone not interested in staying in the house for several years to skip “restructuring” the loan and go for a short sale, and call them when we accept an offer. I had done some research on a mortgage debt relief act passed by congress that would for primary residence exempt us from taxes on the difference between sale price and what we owe. But the real surprise was WF telling me, 1. “commitment met” would be reported to credit agencies, and 2. Wells Fargo would eat the loss and not go after my retirement savings.

We need to get out of this house ASAP, but we want to avoid foreclosure. I’ve done some very rough calculations in my head and and realized that staying put for 10 years will essentially be like paying $2 in loan interest to recover $1 of home value over the next 5 or 10 years. The basic reality is that the new normal is going to mean very slow property appreciation for the next 10 years. Our mortgage payment is $3100 per month with about $2400 in interest.

We have friends interested in our house, but I’ve got an uneasy feeling that the Short Sale option could have pitfalls I’m not considering or aware. And I am concerned that no realtor will be interested in a short sale, and I wonder how many times WF rejects short sale offers EVEN if the offer matches current appraisal (I don’t know what Wells Fargo’s tendency is for accepting short sale offers.

I am in the same sinking boat as everyone else. $65K loss! I like the info provided in this blog. The problem is, in the current credit crunch you now need to put 20% down for a home. I can make my current payments, but I don’t have 20% to put down an another home and then hope my old house rents. I feel it will most likely not rent and I will just be faced with foreclosue or a short sale with the bank after me for $65K.

I have called on the phone and all they will say is “if you dont’ have a hardship, then there is nothing we can do.”
Is my lender legally required to give me written letter stating they wont reduce the principal or reduce my interest?

Yes. I have PLENTY Of hardship. I have been unemployed for over a year and my husband’s pay was decreased by 20K a year ago. We are upside down well over 100K in our condo we bought in 2005. We have been trying to get help from the banks for the past year and because we are current they will not help us. Our condo association wants us out because we have three kids now and there is a strict rule of no more than 4 people per unit. My husband even got “cut” and a year later I am once again pregnant. Even though the loan is under my name the banks wont help bc my husband earns too much. But we are spending more than we make,they just dont consider all the costs with kids. My husband also works 2 hours from home, which is a huge expense. I want to move to another home and stop payment on this condo until the banks decide to work with us, but my husband is scared of hurting my credit and also how it could effect his own credit. Any advice?

Lorin, I am single, young, and obviously stupid. So many of my coworkers are either filing for bankruptcy or clearing all their debt with bankruptcy. My problem is kind of like yours, but you also have children to care for. Don’t worry about your credit; your familiy’s wellbeing is more important. Go buy or rent a more affordable home, and let the condo go. If you and your husbsand are trully facing a financial hardship then then filing bankruptcy will be “easy”.

we live in wv, and have sought relief from our mortgage companies (1st and 2nd) but have been turned away. my dear hubby lost his job due to health reasons 2 years ago, but is employed but making less that 1/3 his former rate. we are at least 125,000 upside down on our loan. we are current on our mortgages, but at this rate, we are are sick and tired of feeling like hampsters in a never ending wheel. so, my ?? is, where should we start? at a lawyer?? what kind? realestate? bankruptcy? i just don’t know what our next step should be. the mortgage companies have been no help at all. our mortgage (1st) is a no intest loan. thanks for any help you can give us.

In 2004 I purchased a condo in NV. In 2005 after getting married I purchased a home for cash in NV. I kept the condo until I was going to retire in 2008. After retirement the condo was upside down and my income was less. When it is rented out I lose about $200 per month but when vacant which happens often I lose $850 per month. I can make the payments but it is very restrictive as I can’t replace my older truck or car as I never know how much my outlay will be from month to month. Any suggestions?

I bought a condo for 200K, a year later, I lost tax abatement, my association went up and I lost 40% of my income. I had to switch jobs, but was not able to recover. The cond is now worth about $119,000. I cashed in my retirement to keep up with the bills, I maxed out my cards, gave up the car and my husband keeps wanting to borrow from family to stay afloat. I dont know what to do. He just doesnt understand that borrowing more is not the way out of this. He thinks Im being irresponsible and giving up to easily, but I just have nothing left to give. Im tired. All my income is scheduled out to make minimum payments and I dont see an end to this. How do I get him to see whats happening? if I let him keep going, we’re going to end up homeless. I dont want to lose the condo, I dont want be be foreclosed on, I dont want to file bankruptcy, but I also just cant keep going. I pay all the bills in the house adn he just doesnt get it. I worry all the time, every minute of the day, I only think of how Im going to pay the next bill.

This may sound harsh… but damn it’s nice to see I’m not the only one in this boat. Misery loves company I guess.

I’m a 29 year old military officer and thought I was ahead of the game buying before 30. Used my VA loan and got myself into a condo for 350k at 5% last year. Only days after I signed, units in the same complex were on sale for 220k and 280k. WTF?

I’m in Afghanistan right now. I have a lot of money saved up. I rented it out for super cheap since I’m gone.

The place needs some work, but it has a pool, hot tub, and un-matchable view. Yea, not the best reasons but I allowed myself to be suckered in. My biggest complaint about the place is that I share a public parking garage with the other tenants. I. HATE. THIS. I recently bought a motorcycle as well and they don’t like when I use my spot for the bike and a visitor spot for the truck. HOA fees… what am I paying for? Paying to be fined and harrassed.

I want out! But I’m upside down probably 50k last I checked. I have about 45k saved up from being deployed. Paid the truck off already. Is there any way I can put the saved up $$ to use? What do you recommend?

I read these posts and feel comforted that I’m not alone, but also sad that there is no way out. I bought a condo in Chicago for 265,000 in 2007 as an “investment”. My husband and I thought that we would live in this up and coming neighborhood, start our family and move out in five years with about a 10,000 gain to put a downpayment on our next home. now we are stuck in the city, with street parking 2 kids in a two bedroom condo and the places in our building are worth 100k less than what we paid…I just don’t see an end and I can’t imagine my family continuing our lives here. We are making our payments and actually applied for a home loan modification so our payments are much more affordable now, but we feel so stuck in our place! Any advice would be helpful!

I went to college, got out of college with a job and bought a house. My first real bachelor pad. I met a girl living at home, and she has moved in with me. Next step should be Marriage and Family, but I cannot raise a family in my post college bachelor pad of a house. I own 120,000 on a property that is valued at 70,000. I can’t sell it for 70,000 because I can’t pay the difference. I can’t sell it at 120,000 because the person buying can’t get a loan for anything near that amount. I can’t see anyone with cash overpaying that much anyway. I make really good money for my age, and work really hard at my job. My life is on hold until I can have a place to move on with it. This makes me depressed.

My husband bought a condo before we married. It is in his name only. We have since had children and moved to a bigger rental closer to work. We have been trying to sell our condo for 4 years. In those 4 years, only 4 units have sold. There are currently 3 units for sale for much less than our mortgage payoff. We haven’t been able to find a renter either, but we have been making the payments. Problem is: the owners of the rental have fallen on hard times and need to sell. We would like to buy and I can qualify for the home on my own, but I can’t carry two mortgages. Since the house is in his name only and since the market is only getting worse and our condo is only depreciating more and since I don’t need his credit to qualify for the home we are currently renting, should we just walk away? Will that ruin my credit too?

Frank,
Though I am not in this exact position, I will be lucky to walk away with 15k in my pocket after (normal) realtor fees (on my town home that backs to the 17th T-and that I put 35k worth of upgrades into), if I choose to go that way. I don’t need to sell, just ready for a change, and actually don’t have a contingency plan. Although I am prequaled for 300k (VA), I don’t have a problem with renting. Interesting that owning a home 20 years ago was the “American Dream” and now it’s the “American Nightmare”. I think what’s made owning a natural inclination is the long standing tax incentives that will probably go away in the next Congress- when they vote the Bush tax cuts out. Maybe that will be a good thing for us. Sorry about that, but not all of us are meant to own.

I agree, buying is overrated and too expensive, and not for everyone.
The tax break just ended up making the homes more expensive to offset the savings. The only winners are the ones that were IN when the tax announcement was made. Now that everything adjusted to make up for the tax breaks, the incentive is not real anymore.

Well, you’d have to agree that no matter how YOU cut it, the normal Joe sees it as an offset for their taxes. When that goes away (as well as with all the other stuff that’s gone on for the last few years), I think the obsession with owning (at all costs) will too.

My condo is 80,000 upside down. We have a 14,000 line of credit. The condo is now too small, we are having a baby. I cannot rent as the association rules prohibit it. I am thinking of short sale, but I don’t know how to start this process. I have been paying my bills, so I don’t know if this works against us.

just found out i’m heavily upside down. my home was purchased new in 2001 for 190k. now it appraises for 131. after 10 years of mortgage payments, i owe 140k. i can’t even re-finance the place right now to get the better 3% rates. the bank wants to wait until obama legislation passes and then charge me higher closing costs because i’m underwater. this is completely rediculous. i can buy my neighbor’s home for 20k less than i owe on my house after 10 years of home payments.

my wife and i want to relocate in a few years and aren’t interested in keeping this home.

I am upside down on a duplex bought in 2007 and put $30,000 in improvements and the appraisel value only went up $3,000. I have no equity in the place.I tried to sell but Im $40,000 upside down I rented the whole place out and moved to a cheaper place but once the mortgage co finds this out Im thinking my payment will go up even more because of non-homstead property taxes plus my home insurance will be change also, not sure how much of an increase. My rent is as high as I could make it, and the mortgage co keeps dragging their feet to help me with a modification. Theirs no profit margin and its putting me in the whole every month, also not sure how next year tax filing with rental income will hurt me also. Any advice?

Not quite upside-down yet, but it seems that the value of our house decreases at about (relatively) the same rate as the amount that comes off the primary. I had a job relocation back in 2010 and we considered selling, but our neighbors next door had for whatever reason purchased a house less than a mile away before their house next to us had sold – some grandma came along and took advantage of their situation and low-balled them on the price and they for some reason went for it. Ultimately it screwed up the market value of our house and we weren’t at a point where we could afford to both move across the country AND take a $35k hit on the house. We ended up renting it out for $125 less than the mortgage.

The first year went by fine, then the tenants decided they wanted to leave. We looked into putting the house up on the market with an agent, but with the commission costs, we would’ve had to sell the house at more than market value to get rid of it without owing money (upside down in that scenario).

We put it up on the market FSBO using a website ($400 one-time fee) and my parents offered to show the place. We had zero showings in the 4 months it was on the market (and 1 no-show). I was trying to decide between using my $3000 life savings (I know…”high roller”) to float until it sold/rented, or just foreclose on it, when another couple decided that they wanted to rent with option to buy. Sounded good to me except that they couldn’t afford to cover the mortgage either. So it’s currently renting for $125 less than the mortgage.

So over 2 years, we’ve been able to “hold on to” that $3000 in life savings. Not much, but we felt secure. Having tenants hasn’t been cheap. The first couple left the house trashed and never paid a security deposit (never rent to your wife’s friends without a security deposit – fool me once). So that was $400 out of my pocket to have the place cleaned. Then the plumbing kept going out ($150 a pop) every 3-4 months or so. I got a call a couple days ago that the plumbing was completely clogged, called the usual company and they told me that the pipes were completely clogged with roots and sod – only way to repair would be to replace the entire pipe from the house to the city line. -$4000. Goodbye life savings. Goodbye security. Now I’m $1000 deeper in debt with zero life savings. I was going to use that money to cover any differences in selling price/amount we owe on the home loan, but now I can’t. If anything else breaks on the property, I simply can’t afford to fix it – because I have no money. I can’t move to a cheaper place because we’re already living in the ghetto of Philadelpia. I literally went out and bought a gun last night because I’m afraid if something else happens, I won’t be able to afford to buy one and defend my family against the idiots that are closing in on us in our home. (they’re getting closer and closer with their crimes…started by stealing from our cars, then the porch…next step is they just break into the house…and then the carpet will need to be replaced).

Anyway – long story short, I have no idea what to do at this point except sit and wait. I just need to get rid of it before it breaks me completely but I don’t have the money to do so. I’m pretty much in the same financial situation I was in before I moved despite all the sacrifices we made to try and get ahead and plan for the future. I guess on the bright side we’re not $4000 in debt.

I refuse to live in this hood forever, and it’s really our old house that’s keeping us here (the $125/mo we pay to cover the mortgage and the plumbing expenses would be enough to move us into a safe neighborhood).